What danger does North Korea present for global investors? Clearly, U.S.
President Donald Trump’s indulgence in nuclear brinksmanship carries risk.
The risk of North Korean dictator Kim Jong Un firing missiles at U.S.
territory in the Western Pacific is also real. And there is a global
existential threat should it ever escalate into intercontinental warfare.
Yet, rather than add to the volumes of prognostications about North Korea’s
specific situation, consider the track record of major events and their
impact on markets.

First, most geopolitical events are false alarms. As card-carrying members
of the change-anticipation field, we understand the desire to divine the
big events. To be first to spot the outlines of a looming disaster can be
glorious (and career-enhancing).

But most warnings are false alarms simply because big turns are rare
events. Remember Y2K, Saddam Hussein’s so-called “weapons of mass
destruction,” and more recently, Brexit? None of the widely-feared
consequences of these threats materialized, and mostly, the outcomes have
been manageable.

Second, more often than not, geopolitical events create opportunity.
Rummaging through past post-crisis periods produces a long list of stellar
returns after the initial event. For example, the Cuban Missile Crisis in
October 1962 was a 13-day confrontation between the U.S. and the Soviet
Union, widely considered the closest the Cold War came to full-scale
nuclear warfare. However, after the crisis subsided, the Dow Jones
Industrial Average went on to gain more than 10% that year. Another
instance was the Korean War, when the North invaded the South. This
conflict lasted from June 1950 to July 1953. During that time, the Dow was
up an annualized 13.6%. History is brimming with similar examples.

Finally, geopolitical events may have binary outcomes. By this, we mean
that a negative scenario would produce either an extremely large portfolio
loss or gain. There is no knowing which ahead of time. As such, narrowly
focusing on one type of risk is speculative at best.

What’s more, such speculation hinges upon achieving two near-perfect
tactical portfolio actions. One is getting out at the right time; the
second is to get back into the markets at the right time. The first
decision is difficult at best. The second step is often overlooked. There
are plenty of analysts who have predicted doom (most far too early) only to
fail to re-invest at the appropriate time. Both errors can be catastrophic.

Consider that investors who went to cash before the 2008 global financial
crisis looked like heroes for a time. Less widely reported is that a large
proportion of them utterly miscalculated their re-entry. Even today, after
missing out on a 150% rally in global stocks since early 2009, many of
these doomsters remain defensively positioned.

A far better approach is to accept that a wide possible set of scenarios
may unfold. From there, investors can insulate against a number of outcomes
by diversifying portfolios across global investment classes and also
readying them for a change in the macro outlook.

Investment implications

Not a small number of people have become financially poor continually
trying to avoid popularly-perceived risks by running for the hills. They
fail to realize that if there were no risks for which to be compensated,
there would be no returns possible above a bogey risk-free rate.

But that doesn’t mean that one shouldn’t manage risks. To the contrary.
What we advise against is a non-diversified definition of risk. Now that
“fire and fury” has caught the world’s eye (whether based upon real facts
or orchestrated histrionics), everyone is focusing on only one form of risk
– a “double dare” shouting match between two politicians. Sadly, most
investors will continue to suffer for their behavioural weaknesses, while
longer-sighted strategists with strong risk management disciplines make off
with gains.

The foregoing is for general information purposes only and is the opinion
of the writer. The author and clients of Forstrong Global Asset Management
may have positions in securities mentioned. Commissions and management fees
may be associated with exchange-traded funds. Please read the prospectus
before investing. Securities mentioned carry risk of loss, and no guarantee
of performance is made or implied. This information is not intended to
provide specific personalized advice including, without limitation,
investment, financial, legal, accounting or tax advice.